Clock Is Ticking on Some Major Tax Breaks

When Congress resumes the budget debate on Wednesday, many companies will be nervously counting the days. That is because 55 federal tax breaks are scheduled to expire at the end of the year.

The uncertainty over their fate already is muddying financial forecasts for next year, corporate executives say.

Topping the list of business breaks: a tax credit for investing in research and development; the so-called “look through rule” that allows multinational companies to shift some profits between their foreign subsidiaries tax free; and the bonus-depreciation rule that allows a company to write off half of its equipment purchases in a single year.

“I don’t know that there’s a real champion for [these measures] right now” in Congress, said Hank Gutman, director of accounting firm KPMG LLP’s Tax Governance Institute and a former chief of staff for Congress’s Joint Committee on Taxation. “In terms of the bigger issues that the country’s facing, they are not high on anybody’s radar now, even though they are of significance for the business community.”

Extending all of the tax breaks for another year could cost the government at least $54 billion over 10 years, according to the Congressional Research Service. That could make them a flashpoint for members of Congress who want to overhaul the tax code for businesses and consumers.

“The problem for business is they don’t know if [the breaks] will be extended and their financial statements have to be prepared on the basis of it being not extended,” Mr. Gutman said.

William Plummer, chief financial officer of United Rentals Inc., said the uncertainty over the temporary credits and the tax code generally makes business forecasting more perilous because of the need to plan for all potential risks and unknowns.

You have to “keep your head on a swivel,” he said.

The congressional budget conference committee starts meeting this week. If its House and Senate members don’t reach a deal that extends the tax provisions by mid-December, the issue is likely to be kicked back to the Senate Finance Committee, where Chairman Max Baucus, a Montana Democrat, is working on a tax overhaul.

Sen. Baucus and his House counterpart, Ways and Means Committee Chairman Dave Camp, a Michigan Republican, have vowed to make progress on tax legislation this year, but their efforts have been eclipsed by the budget battle.

Businesses argue that federal and state corporate income-tax rates in the U.S., which total about 40% according to KPMG, are now the highest in the developed world, putting American firms at a competitive disadvantage.

Japan’s total corporate tax rate fell to around 38% last year.

But opponents of cutting U.S. corporate-tax rates argue that there are so many loopholes that many businesses pay little or no taxes. In May, a congressional committee grilled Apple Inc. Chief Executive Tim Cook on the company’s tax strategy because Senate investigators said it paid no taxes on tens of billions of dollars in foreign income. The company’s effective tax rate for its fiscal year ended Sept. 28 was 26.2%.

Among 389 companies that have been in the S&P 500 index continuously since the end of 2007, the median effective income-tax rate fell to just 28.5% in the first six months of this year, down from 31.8% for 2007, according to data prepared for The Wall Street Journal by S&P Capital IQ.

In most past years, the major tax breaks have been extended, but last year the R&D tax credit was reinstated a year after it expired, and businesses had to apply it retroactively. The Joint Committee on Taxation has pegged the cost of extending the credit another year at about $14.3 billion over 10 years.

If the R&D tax credit lapses again, “I think it would send a sad message,” and spur companies to move more of their research operations overseas, where tax rates are typically lower than in the U.S. and R&D breaks are often larger, said Karen Durant, corporate controller for Tennant Co., a Minneapolis-based maker of mechanized industrial cleaning equipment.

Tennant has an R&D budget of about $30 million, or about 4% of sales, she said, and R&D is run out of its global innovation center in the U.S. The company receives as much as $800,000 in R&D credits. If that credit were cut, Tennant would consider moving its research abroad.

A yearlong extension of the so-called bonus-depreciation tax break—which lets companies write off investments in goods such as manufacturing equipment and computers in the year they were purchased, rather than over time—could cost $4.7 billion over the next decade.

Some other provisions set to expire are industry-specific. There is a 15-year write-off period for restaurants and retailers who improve rental properties.

There also is a production credit for energy companies, as well as a mortgage-insurance deduction for homeowners that could affect home-improvement chains and home builders.

“Tax reform is one of those hard decisions [the U.S. needs] to come to grips with,” said Paul Reilly, chief financial officer of Arrow Electronics Inc., a supply-chain management company based in Englewood, Colo.

“And we haven’t prioritized it at this point to really evaluate what we should do to ensure we not only maintain competitiveness in the global market but become more competitive,” he added.

Energy companies:

Tax credit for facilities that generate renewable energy, such as geothermal or wind power

Restaurants and retailers:

A 15-year write-off period for the cost of improving rental properties

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